Policy Reforms and SME Performances: A Comparison of Two Major EMEs

Abstract

This paper makes a comparative analysis of the major reforms and measures taken by China via-a-vis India to shape their SME sector performances. Since SME sectors are mostly labour intensive labour reforms are absolutely essential. This would in turn, facilitate FDI (foreign direct investment) inflows and ease the credit and finance problems faced by the SMEs. India with its lop-sided distribution of firm-size faces the challenge of “missing middle”. SMEs are finding it suboptimal to grow because of the archaic labour laws in India, that constrain hiring and firing policies related to firm’s downsizing decisions. One observation regarding Chinese reform is that their reform agenda was much ahead of time, holistic and gradual, unlike India’s reform measures, which are piecemeal and non-uniform across time, and hence was partially effective in facilitating stable growth in the SME sector across time. However, recent initiatives are quite ambitious, if the steps get translated into reality the SME sector’s growth might reach its potential.

Keywords

SME sector labour reforms legal reforms

Introduction

Emerging and developing economies’ contribution to the global output has recently crossed the 50 percent mark in PPP (purchasing power parity) terms (53.7 percent in 2016). In terms of growth, the group contributed more than 80 percent to the global growth since 2008. A significant contributor to this growth is the region’s small and medium enterprises (SME) sector. In fact globally, SME make huge contribution to the world GDP and employment. Estimates show that more than 95 percent of enterprises across the world are SMEs, and these enterprises account for approximately 60 percent of private sector employment (Ayyagari, Demirgüç-Kunt, & Maksimovic, 2011), over 95 per cent of firms and 60–70 per cent of employment in OECD.1

OECD policy brief: http://www.oecd.org/cfe/leed/ 1918307.pdf.

Japan, among the industrialized countries, has the highest proportion of SMEs accounting for more than 99 percent of total enterprises (The Economist, 2010). In major emerging market economies (EMEs) such as India and China SMEs contribute more than 40 percent in terms of total export values. SMEs accounted for on an average, 96 percent of all enterprises and 62 percent of the national labor forces across the 20 Asia SME Finance Monitor (ASM) countries.2

This classification is made by ADB in Asia SME Finance Monitor 2014. These countries cover Central Asia, East Asia, South Asia, Southeast Asia, and the Pacific.

SME contribution to the formal sector economic fundamentals, however, is quite varied starting from 16 percent of GDP in low-income countries to 51 percent in high-income countries.3

Edinburg group research on global SMEs: http://www.edinburgh-group.org/media/2776/edinburgh_group_research__growing_the_global_economy_through_smes.pdf

In India the sector is engaged in the manufacturing of over 6,000 products ranging from traditional to hi-tech items; surprisingly, this sector contributed on an average of only 42 percent of the GDP or manufacturing value added in ASM countries (Asian Development Bank, 2014). Major reasons behind such variations are wide-ranging rules and regulations, labor laws, business restrictions, and (dis)incentives to the start-ups. Generally, SMEs have low capital base and are mostly labor intensive in nature; labor laws and regulations play crucial role in the growth and performance of SMEs. Regions with flexible labor laws and less stringent business conditions have a concentration of SMEs, for example, states like Gujarat and Maharashtra and so on.

In this paper, we will take two major emerging economies: India and China, and shed light on the existing laws, especially, the labor laws which have played crucial role in shaping the SME performances in these countries. We will make a comparative analysis of the recent initiatives in the two economies that have boosted the sector further, and discuss some policy implications for India.

China and India: SME Comparatives

As per recent data, the number of SMEs in proportion to total number of enterprises in China is much higher compared to the proportion in India, although the SME growth rate in numbers is marginally higher in India (ADB, 2014). Structural composition of all industries taken together shows that micro and small enterprises (1–49 workers) constitute 84 percent and medium enterprises constitute 5.5 percent of total manufacturing employment in India unlike China, where the numbers are 24.8 and 23.3 percent, respectively (Hasan & Jandoc, 2010). Clearly, Indian SMEs remain to be small compared to the Chinese counterpart. SMEs in China took-off in the mid-2000s in terms of gross industrial output value (National Bureau of Statistics of China, n.d.; Magariños, 2015). Their numbers became 99.6 percent, sale value 58 percent, and employment out of total 75 percent within 25 years (between 1984 and 2009) of permitting privately owned SMEs to operate.4

https://books.google.co.in/books?id=LThmAgAAQBAJ&printsec=frontcover#v=onepage&q&f=false

The National Bureau of Statistics reported in 2013 that SMEs generated 60 percent of the country’s GDP and 50 percent of fiscal and tax revenue.

China’s integration with the global market has had a major contribution in their SME growth; the need of foreign firms to get access to the local markets has helped SMEs to grow. There are, however, associated costs; investments in SMEs are required on continuous basis for acquiring appropriate managerial and manufacturing skills needed to compete in the global market. Benefits are, on the other hand, linked to innovations and possibility of technology transfers by the downstream foreign firms. We will shed light on the small steps and labor reform measures that have helped SMEs in China to grow and reap the benefits of economies of scale, and simultaneously discuss the constraints that might have hindered Indian SMEs to grow at a comparable scale.

China

Chinese government’s 12th five-year plan contains key strategies supporting SMEs. Five primary missions of the plan are to improve the capacity of establishing business and create jobs; to optimize the structure of SMEs; to boost the development of “new, distinctive, sophisticated, and specialized” industries and industrial clusters; to upgrade enterprise management; and to refine SME support systems. In our discussion below, we have categorized the policy reforms that have helped shaping the SME performances as the labor reforms, developmental policy reforms, and SME finance reforms.

Labor Reform

A country with huge populace always faces challenges to address the growing needs of industrial labor demand and at the same time, find commensurate measures to harness the labor resources available in the most-efficient manner. Newer forms of legislation and regulations in the labor market in sync with the changing economic environment, play crucial role in the industrial development of any nation. After the 1970s, China focused on rural industrialization and on “five small industries,” iron and steel, chemical fertilizer, hydroelectric power, cement, and farm implements. Labor reform in China started gradually—way back in the mid-1980s. Some important steps and measures taken under the broad umbrella of labor reforms in China that have facilitated China’s SME growth are discussed below:

Softening of Hukou System

Chinese civilization, like Indian one, was mainly rural based. Huge working populace belonged to rural area, denial of these groups from participating to modern industries would have hindered the growth of the Industry. Hukou system was a stringent rule of issuing a permit to the urban dwellers to have access to urban amenities like urban education and housing. From the period, when rural people were prohibited entry into urban areas the policy shifted to the period when conditional access to urban areas was allowed, and finally to the “green light” period during which (especially from 2000s) reform of hukou system took place along with integration of urban labor markets to form a “national labor market” (Angangand & Xin, 2007). One of the major reasons of low-cost productivity in China is availability of cheap labor, especially, from the Western provinces. Softening of the Hukou system has improved migrant workers’ rights, which, in turn, have helped the labor-intensive SMEs most of which are highly dependent on migrant labor pool.

Contract System

Contract system in China was started in early 1980s. Under this system all laborers were employed on a contract basis with no permanency of employment after the expiry of the contract. The years of contracts varied from 1 to 10 years. Moreover, sacking was rampant and without any explanation. Employers of state run enterprises enjoyed the right to dismiss workers on certain grounds such as indiscipline, poor performance during the probationary period, and violation of company rules. This system continued till the Communist Party made its intentions clear in the early 1990s that it will switch to a market economy. It also pronounced that employment generation was not its task (Lee & Kuruvilla, 2001).

State-owned Enterprises Reform

Government adopted the policy of disposing off small and medium public enterprises while keeping the larger enterprises with it. The Optimal Labour Reorganization Scheme was introduced nationwide in 1989 to identify and reduce surplus labor in state-owned enterprises (SOEs), which was known as “seizing the large and letting go of the small” policy (Knight & Song, 2005). The layoff rule was made more flexible leading to easy firing of excess workers. The length of working week was reduced from six to five days. However, government took adequate measures to accommodate those laid-off workers in various sub-companies. Though this resulted in some dilution of skill as skilled workers had to be accommodated in unskilled and semi-skilled activities but this softening of lay-off rules in government sectors led to easy availability of semi-skilled and skilled workers in private sector and small scale industries. SOE restructuring and planned reduction of their role has been a boon for the Chinese SMEs to grow post 1988; for example, Haier, white good manufacturing took over a failing SOE and became a leading global exporter.

Wage Flexibility

In early 1970s, wage payment was fixed by administrative command. But gradually performance based flexibility was introduced since the mid-1970s and economic forces turned out to be major determining factor for wages. This provided the employers and entrepreneurs a breather for free decision making and promoted fair competition in the labor market. Job responsibility, educational attainments, training began to matter for workers’ pay, and wages of workers came to be linked to their performance. Also, “wage plus bonus” system came to be instituted (Meng, 2000). The 1994 Chinese labor law reflects the intentions of attracting foreign investors. In 2004 manufacturing wages were 800–1200 RMB (Renminbi-chinese currency),, which was at least 20 percent less than European or United States’ pay. Policy orientation toward a flexible wage regime along with performance-linked payment system helped the start-ups to take free employment decisions based on market forces and their expansion capacity.

Trade Union

Since the period of early reforms trade unions in China played the role of transmission belt between the masses and political parties. As far as the influencing capacity and effective existence are concerned, the state-controlled unions were the actual operating elements. All unions need to take registration from All China Federation of Trade Unions (ACFTU). But there were discontent among workers that ACFTU acts only for the government. Being the nationwide large organization, ACFTU failed to address regional and localized demands of the workers. Although workers enjoy their right to join or organize trade unions, the ACFTU enjoys monopoly position legally (Article 2 of TU Law; Sundar & Ratnam, 2007). In the Trade Unions (TU) Law of 1992, everybody has the right to establish a union or to join one (Article 3 of TU Law). On the other hand, the foreign investment enterprises (FIEs) face new challenges for labor market regulation in China as their huge pool of workforce, which is non-unionized largely revolt at poor working conditions. The TU Law amendment of 2001 affords the ACFTU more avenues of enforcement through which to force FIEs to unionize and obliges the ACFTU to be present in private enterprises—especially in FIEs.

Collectively Owned Enterprises

China’s constitutional amendment of 1999 to recognize the legitimate place of private ownership was a key step to encourage the SME start-ups.

Another important step was to develop and enact the collective contract system. The Labor Law (Articles 33–35) and TU Law (Article 20) provide for the development of collective bargaining. Apart from the individual labor contract, there could be collective contracts, which would cover wages, hours of work, leave and rest periods, safety and sanitation, and so on, between collection of workers (trade union or representatives of workers) and employer. The collective contracts (scrutinized by the labor administrative department) are binding on both parties. Collective consultation is one of the mediums for dispute resolution (Article 77 of Labor Law). However, the regulatory barrier to form independent unions giving rise to monopoly power to ACFTU has blunted in practice the legal provision of collective contract making. Nonetheless, the overall result of the reform process in China has been satisfactory, as from world over China has remained the top-most choice as FDI destination.

Developmental Policy and Promotional Policy for SMEs

Government in China has four main administrative departments: The National Development and Reform Commission, China Coordination Centre for Cooperation of SMEs with Foreign Countries, China Association of SMEs, and Local SMEs department in every province. Development policies and plans of governing SMEs were issued in 2003, which explains the SME growth spurt in the post-2003 period. Entrepreneurship and simple innovative technology were given emphasis. Small business centers were developed in localities where nothing other than entrepreneurial spirit exists (e.g., Yiwu county in Zhejiang province with a high concentration of diligent people).

There are various ways by which government supports SMEs. First, the SME promotion law enacted in January 2003, builds the groundwork for public support to SMEs. By this law government protects the lawful investments of SMEs and their equity investors. Government administrative departments protect the legal rights of SMEs including their rights to fair competition and fair trade. The state also identifies priority sectors for SME development through various means. Second, in 2005 the government issued a document titled “State Council on Encouraging, Supporting and Guiding the Development of Private and Other Non-Public Owned Economies” (containing 36 Articles on non-public owned economies), which eased market access conditions for non-public economies, thus according them broader development space.

Third, the government published SME growth project in 2006. Its aims were multi-faceted:

To promote the system building of policy and regulation for SMEs;

To cultivate the social-service system of SME;

To facilitate SME structural adjustment;

To sustain the SME reforms;

To strengthen SME training;

To improve innovative ability;

To resolve financing difficulties affecting SMEs;

To encourage SMEs to expand offshore through the provision of FDI incentives;

To improve the overall supervision of SMEs.

SME Finance

SMEs in China faced multiple problems in meeting financial demands for running and developing the units. Main problems of meeting finance are attributed to the factors credit guarantee system, extremely high-stock market threshold, and inability to get bank loans due to poor accounting practices. To mitigate such problems China introduced innovative policies such as encouraging indirect financing, promotion of credit guarantee system, for example, credit guarantee agencies were exempted from turn over taxes.

Special efforts to improve capital flows to SMEs have been made in 2014. Bank of China recently cut benchmark loan and deposit rates to help SMEs obtain capital. Apart, customs and corporate tax laws were made more business friendly and regulatory framework was made investor friendly that had helped SMEs to capture the global market. SME bond markets are beginning to perform in China (SME joint bonds and SME collective notes). As a new equity venue for SMEs, the National Equities Exchange and Quotations was launched in 2013 as an OTC (over the counter) market. This was regulated by China Securities Regulatory Commission (ADB, 2014). In 2014 state council released 10-point statement in order to reduce SMEs financing costs. This emphasizes increasing the efficiency of loan approval, reducing red-tapism, and developing small and medium financial institutions that are specialized in SME lending.

India

Compared to the Chinese reform India’s policy reform targeting the SME growth has not been up to the satisfactory level. China started early and reaped the benefit early whereas India took a protectionist approach toward SMEs. Reservation of products for exclusive manufacturing in the small scale units was introduced for the first time in 1967. It was 47 items to start, which has increased progressively over time. Such an economic restriction was actually counter-productive, anti-competitive, and has stunted SME growth that led to monopolization and lobbying. Finally, the de-reservation started in early 1990s, done in a massive scale in 2008, and more recently in 2015 government gave special boost to the policy and started imparting fair competition in this sector. In the next section, we will discuss key laws and reforms that have played crucial role in shaping the growth and prospects of Indian SMEs.

Labor Laws

The institutional framework of the Indian labor market is mainly covered by the central laws such as Trade Unions Act, 1926 (TU Act), Industrial Employment (Standing Orders) Act, 1948 (IESO Act), Industrial Disputes Act, 1947 (ID Act), and Contract Labour (Regulation and Abolition) Act, 1970. The main issues relating to the ID Act that is restrictive in that sense, are inability of the employers to introduce changes in the work organization (Section 9-A), lay off, retrenchment, and closure of establishments employing 100 or more workers. The employers desiring to change service conditions relating to wages, hours of work, introduction of new machinery or technology (which might result in retrenchment), and change in workers’ strength should give 21 days of notice to the affected workers. The major problem is far more than the 21 days’ notice—the resistance and litigation that usually follow such notices. Therefore, such a provision delays or obstructs all worthwhile changes in technology, manning, shift work, and so on. Under Article 246 of the Indian Constitution labor and labor welfare issues come under List 3, which is the Concurrent List 2, and exceptional matters related to safety in mines and oilfields and industrial disputes that concern union employees come under Central List. There are 47 central labor laws and 200 state labor laws. But the three major acts that raise concern in ease of doing business and in the decision of downsizing are the Industrial Disputes Act (1947), the Contract Labour (Regulation and Abolition) Act (1970), and the Trade Union Act (1926).

Industrial Disputes Act (ID ACT)

The Industrial Disputes Act is a machinery and procedure for investigation and settlement of industrial disputes and is applicable to all industries irrespective of the size; it pens down conditions of lay-offs, retrenchment, and closure of any industry.

Major Amendments: In 1972, it was amended that any industrial establishment employing more than 50 persons would have to give a notice of 60 days to the appropriate government before the closure of the industry stating reasons for such closure.

In 1976, a special chapter (Chapter V-B) was introduced which made a prior approval of the (appropriate) government in the case of layoffs compulsory, retrenchment, and closure in industrial establishments employing more than 300 workers, again in 1982—it lowered the limit of the employment size to 100 for mandatory permission before any such attempt to closure and increased the number of days of notice to 90 days. In 1984, this amendment was redrafted. Layoffs, retrenchments, and closures in establishments having more than 100 employees had to follow the same procedures and have to seek permission from the government.

For many analysts, the inclusion of Chapter V-B has played a major role in creating hindrance to exercising freedom of decision making to the employers. This in turn has resulted in failure of growth of industry since competitive market forces has been throttled and suppressed by regulation. On the other hand, many suggests Chapter V-B can hardly be viewed as an obstacle toward development of industry and labor market mobilization since only 6 percent of the total labor force of India is in organized sector and this act rules over organized labor force only. Section 9-A of this act has been a cause of concern too. It lays down the conditions for service rules, according to which employees should be given at least a notice of 21 days before modifying wages and other allowances, hours of work, rest intervals, and leave. This often poses as an obstacle to quick adjustment in human resource to meet time bound commitments.

Contract Labour (Regulation and Prohibition) Act (1970)

This is another important aspect of labor reform in India and a long-standing demand on workers’ side to make provisions so that the contract labors are absorbed as regular employees and get all benefits like them. Equal pay for similar work is another major demand of contract laborers. In the 41st Indian labor Conference held in New Delhi on April 2007 members of CITU had proposed few amendments (stated in the following paragraph) which says that they are looking forward to strengthen it:

Redefining employment relationship on the basis of the linkage between the final recipients of the gains of production, that is, the principal employer, vis-à-vis the producer at the lowest rung of the production process deployed through various decentralized agencies.

Outsourcing should be treated as contract and should be covered by Contract Labour -Legislation.

Reiterating the equal pay for same and similar work both for regular and contract/temporary workers in the main body of the legislation (at present similar provision is there in the rules framed under the present statute).

Regularization of contract workers deployed in permanent/perennial jobs in the permanent roll of the company and stringent punishment.

Payment of the minimum wage prevalent in the company/establishment to the contract workers of the said company if it is higher than the statutory minimum wage.

All contractors must obtain license from the appropriate authority for running its operations.

Even if contractor changes, the contract workers engaged by previous contractor should continue to be deployed without any interruption and change in service conditions: this provision should be incorporated as a condition in the tender for appointment of contractor.

The annual return on employment submitted to labor department by the principal employer should compulsorily include details of the contract workers including the contractors and their license details.

In case of death owing to accident or otherwise in course of employment, contract workers should be paid same compensation as the regular workers.

The principal employer should be held responsible for implementation of all labor laws for the contract workers including maintenance of employment register, submission of annual returns to labor department, PF, ESI, and other social security measures and workmen’s compensation any violation of those laws should attract stringent punishment on the principal employers as well.

A separate inspectorate with adequate manpower has to be established in all states only for the purpose for inspection of the contract-employment-related matters.

Contract labor monitoring board must be constituted in all states and central level with the representatives of unions, employers, and government to monitor implementation of labor laws in respect of contract workers, and so on.

Trade Union Act, 1926

There is no compulsion for the employers to enter into a collective bargaining. Even though there is a right to form an association or form a trade union it is not mandatory for an employer to recognize it. The Trade Union Act was introduced in 1926, which legalized trade unions. It allows any seven workers to form a union and seek registration to take part in collective bargaining negotiations. It also allows unionization in both organized as well as unorganized sectors. There was an amendment in 2001 which raised the minimum number of workers to 100 or more, to form a union. Out of which one-third or five officers, whichever is less, are permitted to be outsiders in the organized sector. This amendment has been criticized from the very day it was implemented. Outsiders’ intervention in the inner matters of an organization is not allowed in any country. However, according to the Economic Survey, 2014–2015, the fact that man-days lost due to lockout have been steadily declining, 17.6 million in 2009 to 14.46 million in 2011, and further to 1.79 million (provisional) from January 2014 to December 9, 2014. This shows increasing industrial harmony in India in recent times.

Recent Reforms

Labor Reform

A new bill has been proposed by the central government which proposes to raise the salary ceiling for bonus payments (statutory) to `21,000 per month from `10,000 specified under the 1965 law (Payment of Bonus Act, 1965). Also, the code on industrial relations would substitute three laws—the Trade Unions Act of 1926, the Industrial Disputes Act, and the Industrial Employment (Standing Orders) Act of 1946.

The Apprentice Act 1961 was amended on December 2014 to make it more responsive to the industry and youth. The Apprentice Protsahan Yojana was also launched in order to support the SMEs in manufacturing. Government is also working to bring a single and uniform law for the SME sector to ensure operational efficiency and improve productivity, at the same time ensuring job creation on a large scale.

A unified labor portal scheme called Shram Suvidha Portal5

http://esic.nic.in/page.php?pid=NzI=

has been launched for timely redressal of grievances and to create a conducive environment for industrial development. The main features are (i) Unique Labor Identification Number (LIN) allotted to around 0.7 million units facilitating online registration; (ii) filing of self-certified, simplified single online return; (iii) transparent labor inspection scheme via computerized system based on risk-based criteria and uploading of inspection reports within 72 hours by labor inspectors.

For unorganized workers: The Rashtriya Swasthya Bima Yojana (RSBY): This is a scheme under the Unorganized Workers’ Social Security Act 2008. It is a smart card-based cashless health insurance scheme, which includes maternity benefit and provides a cover of `30,000 per family per annum on a family floater basis to below poverty line families in the unorganized sector. It is proposed to extend the RSBY to all unorganized workers gradually. A National Council for Vocational Training–Management Information System (NCVT–MIS) portal has been developed in order to streamline the functioning of Industrial Training Institutes, Apprenticeship Scheme, and assessment/certification of all NCVT training courses. This will facilitate skill-starved SMEs to get hold of the right skills at right time in the global arena of changing competitiveness.

The recent policies put utmost care to generate employment and reap the benefit of demographic dividend. Policymakers understand that labor laws must be made more employment friendly to boost uninterrupted mass manufacturing. In October 2014 two key labor reforms were announced: “unified labor and industrial portal” and “labor inspection scheme,” which will make labor inspection criteria and processes more transparent, and help the SMEs. Presently, there is huge allegation and discontent amongst SME owners and management regarding the inspection process and criteria. Introducing a LIN and putting regular inspection on a unified portal will make the labor rules transparent. PM’s efforts to raise the minimum wage, ensure access to the pension system and the Employment Provident Fund by the vulnerable group is commendable. This will facilitate transition of SMEs to the formal sector and create more formal jobs.

Developmental Policy and Promotional Policy for SMEs

Among the most recent initiatives that give boost to the SME sector is the Make in India initiative that has SME as one of the focus sectors. It is a drive of making the manufacturing sector more vibrant and dynamic. Various incentive schemes are designed with special focus on the impediments that the SMEs face, technology development is one of them to cope with the rapid shifting of global market and consumer preferences. SMEs will be given access to the patent pool and part of reimbursement of technology acquisition costs up to a maximum of `2,000,000 for the purpose of acquiring appropriate technologies up to a maximum of 5 years. Special benefits have been designed for SMEs to incentivize start-ups and ease persistence. Those are the following:6

http://www.makeinindia.com/policy/national-manufacturing

Rollover relief from long-term capital gains tax to individuals on sale of residential property in case of re-investment of sale consideration.

• A tax pass-through status for venture capital funds with a focus on SMEs in the manufacturing sector.

• Liberalization of RBI norms for banks investing in venture capital funds with a focus on SMEs, in consultation with RBI.

The liberalization of IRDA guidelines to provide for investments by insurance companies.

The inclusion of lending to SMEs in manufacturing as part of priority sector lending.

Easier access to bank finance through appropriate bank lending norms.

The setting up of a stock exchange for SMEs.

Service entity for the collection and payment of statutory dues of SMEs.

SME Finance

India, like many other low-income emerging nations, has a narrow ranging SME finance policy, focused on microfinance and government-based concessional lending scheme. China and many other middle income emerging nations that have given thrust to the sector have targeted various policies linked to bankability of SMEs, which includes public credit guarantee schemes and secured lending legal reform (ADB, 2014). To ensure better flow of credit to SMEs, the ministry in its recent drive has introduced a policy package for stepping up credit to the SMEs. This operates schemes such as Credit Guarantee Fund Scheme and the Performance and Credit Rating Scheme. Nonetheless, there is a long way to go on SME credit reform, as finance has still remained the single most crucial hurdle for the start-ups. Deepening of the financial sector and widening the avenues of fund sourcing are two major policy imperatives that can facilitate credit flow to this sector.

Conclusion

This paper outlines the major reforms and measures taken by China and India that have helped shaping the SME sector performances in these two countries. One observation regarding Chinese reform is that it was much ahead of time, holistic, and was gradual unlike India’s reform agenda, which was piecemeal and not uniform across time, and thus was partially effective in facilitating uniform growth of SME across time. Since SME sectors are mostly labor intensive, labor reforms are absolutely essential. No other reform can substitute labor reform, and China could understand it when they decided to convert to a market economy. This would in turn, facilitate FDI inflows and ease the credit and finance problems faced by SMEs. In India distribution of firm-size shows that it has a missing-middle problem implying, SMEs are finding it suboptimal to grow because of the archaic labor laws that constrain hiring and firing policies related to firm’s downsizing decisions. The Chinese policies encompass innovative schemes such as technology incubator, entrepreneurship monitoring, international SME fair since 2003, technology exchange markets, SME galaxy training programs, opening SME information portal, introducing government-backed SME patent funds and so on. SME finance reforms are another area of necessary reform. As we know credit-constraint faced by SMEs are common phenomena across the globe. But opening up of modern avenues of SME finance and engaging the sector in the mainstream financial markets through development of specialized stock exchanges are some of the pragmatic steps required. The step must be driven by market forces and have to be self-selected, otherwise problem of adverse selection and moral hazard will make the lending inefficient and create many other macro problems such as cycles of NPA (nonperforming assets) proliferations and credit rationing by lenders. India through its Make in India initiative, is trying to identify the basic impediments of the sector, though it remains to be seen how much of this ambitious agenda gets translated into reality and help the sector to grow faster enough to reach its potential.

Footnotes

Author's Biography

Dr. Sahana Roy Chowdhury is an Assistant Professor of Economics at the International Management Institute-Kolkata. Sahana received her M.S.(Q.E.) and Ph.D. from Indian Statistical Institute. She has 8 years of research and teaching experience in economic theory and policy. Her research interest lies in Development economics, Labour economics and Fiscal policy issues and teaching interests are Macroeconomics and Managerial economics.

Prior to joining IMI-K she worked at the National Institute of Public Finance and Policy, Delhi in the Macro-Finance Division. In the past she worked as an Economist in the Monetary Research Project Division of ICRA Limited, India, at Indian Council for Research on International Economic Relations (ICRIER), New Delhi as Fellow and was a visiting scientist at the Cornell University, USA.

She presented papers in several national and international conferences and have published in international journals such as Economic Modelling, Journal of Economics, Metroeconomica, Indian Growth and Development Review, Global Business Review etc.

Ms. Sayani Roy Chowdhury is an advocate practicing in Civil side of High Court, Calcutta. She is in the inquiry committees of National Commission for Women (NCW), GOI as committee member and has represented NCW in High Court Calcutta. She is in the panel of AIR INDIA and represents various Banks in High Court, Calcutta. Ms. Sayani is presently an elected committee member of High Court Calcutta Bar Association.

Apart from that Ms. Sayani is a regular Guest Lecturer teaching legal subjects in the Department of Business Management, University of Calcutta. She is an alumnus of Presidency College, Kolkata (MSc. In Applied Economics) and University of Calcutta (MBA).

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